Law Firm Uses Attorney-Client Privilege As Shield In Derivative Suit

Nancy Wojtas at Cooley LLP recently brought an interesting ruling to my attention that involves the interplay between derivative litigation and the attorney-client privilege, IP Telesis Inc. v. Velocity Networks Inc., C.D. Cal. Case No.CV 11-09950 RGK (AJWx) (Nov. 5, 2012). The case involved a derivative suit against a law firm. The plaintiff charged the law firm with aiding, abetting and conspiring in a breach of fiduciary duties by the corporation. It seems that the corporation had approved a repurchase of shares held by two of its directors. After having been advised by the law firm that this would violate California law, the president (who was also a director) repurchased most of the shares and the corporation purchased the balance.

The defendant law firm moved to dismiss on the basis of the attorney-client privilege. Judge R. Gary Klausner ruled that under California law a “derivative suit against a corporation’s attorney may be dismissed where, in the absence of waiver by the corporate client, the attorney is effectively foreclosed from mounting any meaningful defense because attorney-client privilege bars disclosure of communications that would form the defense.” (footnote omitted) (citing McDermott, Will & Emery v. Super. Ct., 83 Cal. App. 4th 378, 385 (2000); Virtanen v. O’Connell, 140 Cal. App. 4th 688, 702 (2006)). Normally, the filing of a lawsuit against an attorney results in a waiver. Cal. Evid. Code § 958 (“There is no privilege under this article as to a communication relevant to an issue of breach, by the lawyer or by the client, of a duty arising out of the lawyer-client relationship.”) Judge Klausner, however, found that the corporation, not the plaintiff-shareholder, is the holder of the privilege “so the privilege is not waived by a shareholder filing a derivative claim against the attorney defendant.”

If you want to read about a really extraordinary shield, check out Book 18 of The Iliad in which Homer gives a wonderful ekphrastic description of Achilles’ shield. If you would like to see a silver-gilt replica of the shield, The Huntington Library in San Marino, California used to display one the five shields fashioned in 1823 by the royal goldsmiths, Rundell, Bridge & Rundell. It’s been a while since I’ve visited the shield so I can’t say whether the library still has this remarkable work of art on display.

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